Zodiac Clothing Company

Company Update

Expansion of retail network, large installed capacities and existing strategic relationships with Shoppers Stop (holding of 2.9% shares valued at Rs51cr) are some of the advantages that ZCC enjoys to tap the emerging domestic and outsourcing opportunities. Further, we believe the stock is trading at a considerable discount to its peers, which are trading at around 30x FY2009E EPS.

Company Background

Promoted by MY Noorani in 1954, Zodiac Clothing Company (ZCC) is one of the oldest branded garment exporter with a diversified geographical mix ofexport and domestic sales, and a significant retail presence in the country. ZCC is a Mumbai-based vertically integrated design driven and marketing led clothing company, which has operations ranging from design to retail. The company manufactures premium shirts and ties, men’s accessories and trousers. ZCC’s Zod brand is a phenomenal success. ZCC has operations primarily in India, UAE, Germany, USA and UK.
The company’s major export markets include USA, UK, Europe and, to a lesser extent, the Middle East and Latin America. A major part of ZCC’s export business functions under a private label (the customer’s brand). Zodiac imports more than 50% of the total raw material requirements.The company sources it’s raw materials from Europe as well as from low-cost countries like Taiwan and China, thereby containing the raw material costs.

ZCC plans US foray and entery into women’s western wear segment: ZCC is set to enter the highly competitive US market with its branded shirts. ZCC is already present in the West European and West Asian markets. ZCC also plans to enter the fastest growing Women’s western wear segment.Also on the anvil are company’s plans to launch its third men’s wear brand (after Zodiac and Zod) in the country. Segmenting the men’s wear market further, the third brand with occasion-based clothing would be targeting males in the mid-20 to 30 years age group.


Expanding Retail network: ZCC retails its brands through three distinct retail channels viz., MBOs estimated at around 1,000 which contribute around 50% of branded revenues;Organized retailers such as Shopper’s Stop, Lifestyle, etc., which contribute to around 20% of branded sales; Exclusive owned stores for Zodiac and Zod. ZCC had 57 stores (2HFY2008), which contribute approximately 30% of branded sales.
ZCC has aggressive plans to increase its retail presence and distribution through its own exclusive stores (currently 57 stores) and through a national chain of stores. The plan includes roll out of 30 exclusive stores per annum over the next three years, with a yearly capex of around Rs20cr. The retail stores would be on lease but managed by ZCC. It also expects to open its shop in Dubai. The brand is already available across the West Asian markets.


Favourable shift in Revenue-mix: ZCC’s turnover is derived from a blend of exports and domestic sales in the ratio of 67:33. However, rapid addition of owned stores in the domestic market is expected to change the ratio to 60:40 wherein contribution from domestic sales will increase and aid expansion in OPMs. ZCC has a capex of Rs40cr to be completed over FY2008-09E for owned store rollouts. This will be entirely funded through internal accruals and debt.

Fund raising Plans for entering higher growth phase: ZCC has embarked on a Rs250cr expansion plan, which would be funded through the issue of 15lakh shares to the non promoters and 4.4lakh convertible warrants to the promoters at a price to be decided later.

Valuation

At Rs440, the stock trades at 11.8x FY2008E and 9.7x FY2009E EPS of Rs37.3 and Rs45.6, respectively. We have revised our FY2009E Earnings upwards by 19%. Hence, we re-iterate a Buy on the stock, with a revised 12-month Target Price of Rs547(Rs380).

----- With due apologies and full credits to Angel Broking Limited